a

GAO

United States Government Accountability Office

Report to Congressional Committees

September 2005 FINANCIAL 

MANAGEMENT

Achieving FFMIA 

Compliance Continues 

to Challenge Agencies

GAO-05-881
www.gao.gov/cgi-bin/getrpt?GAO-05-881.

To view the full product, including the scope 

and methodology, click on the link above. 

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Thompson at (202) 512-2600 or 

thompsons@gao.gov. 

Highlights of GAO-05-881, a report to the 

Committee on Homeland Security and 

Governmental Affairs, U.S. Senate, and 

the Committee on Government Reform, 

House of Representatives 

September 2005

FINANCIAL MANAGEMENT 

Achieving FFMIA Compliance Continues 

to Challenge Agencies 

While most CFO Act agencies have obtained clean or unqualified audit 

opinions on their financial statements, the underlying financial systems 

remain a serious problem. Agencies still lack the capacity to create the 

full range of information needed for effective day-to-day management. In 

fiscal year 2004, auditors for 16 of the 23 CFO Act agencies reported that 

agencies’ financial management systems failed to comply with FFMIA. 

As shown in the figure below, primarily six types of problems related to 

agencies systems were identified in the audit reports. These same types 

of problems have been consistently reported for agencies with 

noncompliant systems for a number of years. GAO views these problems 

with agency financial systems to be a significant challenge to improving 

the management of the federal government. 

Auditors for six agencies provided negative assurance on systems’ 

FFMIA compliance for fiscal year 2004. This means that nothing came to 

their attention to indicate that financial management systems did not 

meet FFMIA requirements. OMB’s current reporting guidance calls for 

negative assurance; however, GAO continues to believe that this type of 

reporting is not sufficient for reporting under the act. In addition, 

negative assurance may provide the false impression that the auditors are 

reporting that the agencies’ systems are compliant. In contrast, auditors 

for the Department of Labor (DOL) provided positive assurance by 

reporting that DOL’s financial management systems substantially 

complied with FFMIA requirements. In fiscal year 2005, DOL auditors 

plan to enhance their audit procedures to focus on the reliability and use 

of managerial cost information. GAO looks forward to other auditors 

adopting a similar reporting practice that adds more value. In addition, 

auditors have expressed concern about providing positive assurance 

because of the need to clarify the meaning of substantial compliance. 

OMB continues to move ahead on other initiatives to enhance financial 

management in the federal government. Moreover, the continuing 

leadership and support of Congress will be crucial in reforming financial 

management in the federal government. 

The ability to produce the data 

needed to efficiently and effectively

manage the day-to-day operations 

of the federal government and 

provide accountability to taxpayers 

continues to be a challenge for 

most federal agencies. To help 

address this challenge, the Federal 

Financial Management 

Improvement Act of 1996 (FFMIA) 

requires the Chief Financial 

Officers (CFO) Act agencies to 

implement and maintain financial 

management systems that comply 

substantially with (1) federal 

financial management systems 

requirements, (2) federal 

accounting standards, and (3) the 

U.S. Government Standard 

General Ledger (SGL). FFMIA also 

requires GAO to report annually on 

the implementation of the act. 

GAO reaffirms its prior 

recommendations that OMB revise 

its guidance to require positive 

assurance regarding substantial 

compliance with the requirements 

of FFMIA, and clarify “substantial 

compliance” to promote consistent 

reporting. As in the past, OMB did 

not agree with GAO’s view on the 

need for auditors to provide 

positive assurance on FFMIA, but 

agreed to consider clarifying the 

definition of “substantial 

compliance” in future policy and 

guidance updates. We believe that 

positive assurance is a statutory 

requirement and will continue to 

work with OMB on this issue. 
Page i GAO-05-881 FFMIA FY 2004 Results

Contents

Letter 1

Results in Brief 2

Background 6

Guidance for FFMIA Issued by OMB 8

Financial Audit Manual Section on FFMIA Developed by GAO and 

PCIE 8

Scope and Methodology 9

Systems Weaknesses Continue to Impede Financial Management 

Accountability 10

FFMIA Compliance Findings Mostly Based on Negative

Assurance 14

Reasons for Noncompliance 18

Key Initiatives That Impact Federal Financial Management

Systems 27

DOD Continues to Struggle to Enhance Financial Management 30

Continuing Congressional Interest Helps Provide Accountability 32

Conclusions 33

Agency Comments and Our Evaluation 34

Appendixes

Appendix I: Requirements and Standards Supporting Federal Financial 

Management 37

Appendix II: Publications in the Federal Financial Management Systems 

Requirements Series 42

Appendix III: Statements of Federal Financial Accounting Concepts, 

Standards, Interpretations, and Technical Bulletins 43

Appendix IV: AAPC Technical Releases 45

Appendix V: Checklists for Reviewing Systems under the Federal 

Financial Management Improvement Act 46

Appendix VI: Comments from the Office of Management and Budget 47

Appendix VII: Auditors’ FFMIA Determinations for Fiscal Year 2004 49

Appendix VIII: GAO Contact and Staff Acknowledgments 50

Figures Figure 1: Problems Reported by Auditors for Fiscal Years 2000 

through 2004 4

Figure 2: Auditors’ FFMIA Assessments for Fiscal Years 2000 

through 2004 11
Contents

Page ii GAO-05-881 FFMIA FY 2004 Results

Figure 3: Problems Reported by Auditors for Fiscal Years 2000 

through 2004 19

Figure 4: Agency Systems Architecture 38

Abbreviations

AAPC Accounting and Auditing Policy Committee 

AICPA American Institute of Certified Public Accountants

AID Agency for International Development 

BPD Bureau of the Public Debt

CFO chief financial officer

COE centers of excellence

COTS commercial off-the-shelf 

DFAS Defense Finance and Accounting Service

DHS Department of Homeland Security 

DOD Department of Defense

DOJ Department of Justice

DOL Department of Labor

DOT Department of Transportation

EPA Environmental Protection Agency 

FAM GAO/PCIE Financial Audit Manual

FASAB Federal Accounting Standards Advisory Board 

FBWT Fund Balance with Treasury

FEA Federal Enterprise Architecture

FEMA Federal Emergency Management Agency

FFMIA Federal Financial Management Improvement Act

FFMSR Federal Financial Management System Requirements 

FISMA Federal Information Security Management Act 

FMFIA Federal Managers’ Financial Integrity Act 

FSIC Financial Systems Integration Committee

GSA General Services Administration 

HHS Department of Health and Human Services

IRS Internal Revenue Service

JFMIP Joint Financial Management Improvement Program 

LOB line of business

MACS Mission Accounting and Control System

NASA National Aeronautics and Space Administration

NBC National Business Center 

NRC Nuclear Regulatory Commission 

NSF National Science Foundation 

OFFM Office of Federal Financial Management
Contents

Page iii GAO-05-881 FFMIA FY 2004 Results

OIG office of inspector general 

OMB Office of Management and Budget

OPM Office of Personnel Management 

PCIE President’s Council on Integrity and Efficiency 

PMO Program Management Office 

SFFAC Statement of Federal Financial Accounting Concepts

SFFAS Statement of Federal Financial Accounting Standards 

SGL U.S. Government Standard General Ledger

SSA Social Security Administration 

USDA U.S. Department of Agriculture

VA Department of Veterans Affairs 

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Page 1 GAO-05-881 FFMIA FY 2004 Results

United States Government Accountability Office

Washington, D.C. 20548

Comptroller General A of the United States

September 20, 2005 Letr

The Honorable Susan M. Collins

Chairman

The Honorable Joseph I. Lieberman

Ranking Minority Member

Committee on Homeland Security and Governmental Affairs

United States Senate

The Honorable Tom Davis

Chairman

The Honorable Henry A. Waxman

Ranking Minority Member

Committee on Government Reform

House of Representatives

Most federal agencies continue to lack the financial data needed to 

efficiently and effectively manage day-to-day operations and to provide an 

acceptable level of accountability to taxpayers. In 1990, to address this 

long-standing weakness, Congress mandated financial management reform 

within the federal government by enacting the Chief Financial Officers 

(CFO) Act,1

 which requires the modernization of financial management 

systems by agencies in order to attain the systematic measurement of 

performance; the development of cost information; and the integration of 

program, budget, and financial information for management reporting. The 

goal of the CFO Act is to improve accounting and financial management 

practices by providing management with the full range of information 

needed for day-to-day management.

The Federal Financial Management Improvement Act of 19962

 (FFMIA) 

builds on the foundation laid by the CFO Act by emphasizing the need for 

agencies to have financial management systems that can generate reliable, 

useful, and timely information with which to make fully informed decisions 

and to ensure accountability on an ongoing basis. FFMIA requires the

1

Pub. L. No. 101-576, 104 Stat. 2838 (1990).

2

Federal Financial Management Improvement Act of 1996, Pub. L. No. 104-208, div. A., § 

101(f), title VIII, 110 Stat. 3009, 3009-389 (Sept. 30, 1996).
Page 2 GAO-05-881 FFMIA FY 2004 Results

major departments and agencies covered by the CFO Act3 to implement 

and maintain financial management systems that comply substantially with 

(1) federal financial management systems requirements, (2) applicable 

federal accounting standards, and (3) the U.S. Government Standard 

General Ledger (SGL) at the transaction level. The act also requires 

auditors to state in their audit reports whether the agencies’ financial 

management systems substantially comply with the act’s requirements. In 

addition, we are required to report annually on the implementation status 

of the act. This report, our ninth, discusses (1) the auditors’ assessments of 

agency systems’ compliance with FFMIA for fiscal year 2004 and the 

financial management systems problems that continue to affect systems’ 

FFMIA compliance and (2) the initiatives underway to help move federal 

financial management toward FFMIA compliance.

We conducted our work in the Washington, D.C. area from February 2005 

through May 2005, in accordance with U.S. generally accepted government 

auditing standards. 

Results in Brief While more CFO Act agencies have obtained clean or unqualified audit 

opinions on their financial statements, the underlying agency financial 

systems remain a serious problem. Agencies still generally lack the 

capacity to create the full range of information needed to effectively 

manage day-to-day operations. For fiscal year 2004, auditors for 16 of the 23 

CFO Act agencies reported that their agencies’ financial management 

systems did not comply substantially with one or more of the three FFMIA 

requirements. As a result of these deficiencies, the financial management 

systems of most agencies are still unable to routinely produce reliable, 

useful, and timely financial information. This weakness limits the federal 

government’s capacity to manage with timely and objective data, and 

3

There were initially 24 CFO Act agencies. See Pub. L. No. 101-576, §205, 104 Stat. 2838, 

2842-2843 (1990). The Federal Emergency Management Agency (FEMA), one of the 24 CFO 

Act agencies, was subsequently transferred to the Department of Homeland Security (DHS) 

effective March 1, 2003. With this transfer, FEMA is no longer required to prepare and have 

audited financial statements under the CFO Act, leaving 23 CFO Act agencies for fiscal year 

2004. For fiscal years 2003 and 2004, DHS was required to prepare audited financial 

statements under the Accountability of Tax Dollars Act of 2002 (Pub. L. No. 107-289, 116 

Stat. 2049 (Nov. 7, 2002)). Because DHS was not a CFO Act agency, it was not subject to 

FFMIA for fiscal year 2004. The DHS Financial Accountability Act, Pub. L. No. 108-330, 118 

Stat. 1275 (Oct. 16, 2004), added DHS to the list of CFO Act agencies and deleted FEMA, 

increasing the number of CFO Act agencies again to 24 for fiscal year 2005.
Page 3 GAO-05-881 FFMIA FY 2004 Results

thereby hampers its ability to effectively manage and oversee its major 

programs.

Auditors for the other seven CFO Act agencies did not report such 

problems but for the most part did not offer assurances that this was in fact 

the case. Auditors for six4

 of the seven agencies reported that the results of 

their tests disclosed no instances in which the agencies’ systems did not 

substantially comply with FFMIA. These auditors provided what is termed 

negative assurance of FFMIA compliance when they reported that nothing 

came to their attention during the course of their planned procedures to 

indicate that these agencies’ financial management systems did not meet 

FFMIA requirements. While negative assurance is the level of assurance 

allowed by the Office of Management and Budget’s (OMB) audit guidance, 

the auditors for one agency, the Department of Labor (DOL), instead 

provided positive assurance when they reported that in their opinion, DOL’s 

financial management systems substantially complied with the 

requirements of FFMIA. Providing positive assurance, as required by the 

act, involves more testing than that performed by auditors to render an 

opinion on the financial statements. DOL’s auditors told us that the extent 

of their audit procedures enabled them to conclude that DOL’s systems 

were substantially compliant with the provisions of FFMIA. For fiscal year 

2005, the DOL auditors plan to enhance their procedures to increase their 

focus on the reliability and use of managerial cost information, among 

other things. This is a very positive action by the DOL auditors, and we look 

forward to other agencies adopting a similar reporting practice.

The Department of Homeland Security Financial Accountability Act5

 added 

the Department of Homeland Security (DHS) to the list of CFO Act 

agencies effective for fiscal year 2005. With that designation, DHS will be 

subject to FFMIA for fiscal year 2005. Because DHS was not subject to 

FFMIA in fiscal year 2004, we have not included DHS in our summaries of 

compliance with FFMIA and problems reported by the auditors for fiscal 

year 2004. However, we have noted that the DHS auditors identified and 

reported deficiencies that relate to all three FFMIA requirements. We plan 

to include DHS in our analysis of the fiscal year 2005 FFMIA results. 

4

The Department of Commerce, the Department of Energy, the Environmental Protection 

Agency, the General Services Administration, the National Science Foundation, and the 

Social Security Administration. 

5

Pub. L. No. 108-330, 118 Stat. 1275 (Oct. 16, 2004).
Page 4 GAO-05-881 FFMIA FY 2004 Results

As shown in figure 1, agencies have not yet achieved the goals of FFMIA—

as well as the CFO Act—to establish financial management systems that 

support controlling the cost of the federal government and improving the 

performance, productivity, and efficiency of federal financial management. 

Based on our review of the fiscal year 2004 audit reports for the 16 agencies 

reported to have noncompliant systems, the same six primary problems 

continue to affect FFMIA compliance. While more severe at some agencies 

than others, the nature and seriousness of the problems reported indicate 

that generally most agencies’ financial management systems are not yet 

able to routinely produce reliable, useful, and timely financial information. 

We view the problems with agencies’ financial management systems to be a 

significant challenge to improving the management of government.

Figure 1: Problems Reported by Auditors for Fiscal Years 2000 through 2004 

13

16

14

8

12

19

14

13

14

15

16

8

14

20

13

11 11 11

10

11

12

11 11

15

11

17 17

9

13

19

0

4

8

12

16

20

24

Nonintegrated

financial 

management

systems

Inadequate

reconciliation

procedures

Lack of accurate 

and timely 

recording

Noncompliance 

with the SGL

Lack of adherence 

to federal accounting 

standards

Weak security 

over information 

systems

Agencies

Fiscal year 2000

Fiscal year 2001

Fiscal year 2002

Fiscal year 2003

Fiscal year 2004

Source: GAO analysis, based on independent auditors' reports prepared by agency inspectors general and contract auditors for 

fiscal years 2000-2004.
Page 5 GAO-05-881 FFMIA FY 2004 Results

OMB continues to move forward on new initiatives to enhance financial 

management and provide results-oriented information in the federal 

government. Two notable developments in this area in fiscal year 2004 were 

the realignment of responsibilities formerly performed by the Joint 

Financial Management Improvement Program (JFMIP) and the 

development of financial management lines of business.

While we are not making any new recommendations in this report, we 

reaffirm our prior recommendations6

 aimed at enhancing OMB’s audit 

guidance related to FFMIA assessments. Specifically, we recommended 

that OMB (1) require agency auditors to provide a statement of positive 

assurance when reporting an agency’s systems to be in substantial 

compliance with the requirements of FFMIA and (2) further clarify the 

definition of “substantial compliance” to encourage consistent reporting. 

As we noted in our prior reports, auditors we interviewed had concerns 

about providing positive assurance in reporting on agency systems’ FFMIA 

compliance because of a need for clarification regarding the meaning of 

substantial compliance. 

In commenting on a draft of this report, OMB agreed with our assessment 

that many federal agencies still need to make improvements to generate 

more accurate and timely financial information to optimize day-to-day 

operations. Moreover, OMB agreed with us that financial management 

success encompasses more than agencies receiving unqualified opinions 

on their financial statements. As in previous years, we and OMB have 

differing views on the level of audit assurance necessary for assessing 

compliance with FFMIA. While OMB commended DOL’s auditors for 

performing the additional level of audit work needed to provide positive 

assurance of compliance with FFMIA and encouraged similar efforts at 

other agencies, it stated that requiring a statement of positive assurance for 

all agencies was not necessary. We continue to believe that a statement of 

positive assurance is a statutory requirement under the act and will 

continue to work with OMB on this issue. OMB did agree to consider 

clarifying the definition of “substantial compliance” in its future policy and 

6

GAO, Financial Management: FFMIA Implementation Critical for Federal 

Accountability, GAO-02-29 (Washington, D.C.: Oct. 1, 2001); Financial Management: 

FFMIA Implementation Necessary to Achieve Accountability, GAO-03-31 (Washington, 

D.C.: Oct. 1, 2002); Financial Management: Sustained Efforts Needed to Achieve FFMIA 

Accountability, GAO-03-1062 (Washington, D.C.: Sept. 30, 2003); and Financial 

Management: Improved Financial Systems Are Key to FFMIA Compliance, GAO-05-20

(Washington, D.C.: Oct. 1, 2004). 
Page 6 GAO-05-881 FFMIA FY 2004 Results

guidance updates. Our detailed evaluation of OMB’s comments can be 

found at the end of this letter. 

Background FFMIA is part of a series of management reform legislation passed by 

Congress over the past two decades. This series of legislation started with 

the Federal Managers’ Financial Integrity Act of 1982 (FMFIA),7

 which 

Congress passed to strengthen internal controls and accounting systems 

throughout the federal government, among other purposes. Issued 

pursuant to FMFIA, the Comptroller General’s Standards for Internal 

Control in the Federal Government8

 provides the standards that are 

directed at helping agency managers implement effective internal control, 

an integral part of improving financial management systems. Internal 

control is a major part of managing an organization and comprises the 

plans, methods, and procedures used to meet missions, goals, and 

objectives. In summary, internal control, which under OMB’s guidance for 

FMFIA is synonymous with management control, helps government 

program managers achieve desired results through effective stewardship of 

public resources. 

Effective internal control also helps in managing change to cope with 

shifting environments and evolving demands and priorities. As programs 

change and agencies strive to improve operational processes and 

implement new technological developments, management must 

continually assess and evaluate its internal control to ensure that the 

control activities being used are effective and updated when necessary. 

While agencies had achieved some success in identifying and correcting 

material internal control and accounting system weaknesses, their efforts 

to implement FMFIA had not produced the results intended by Congress.

Therefore, in the 1990s, Congress passed additional management reform 

legislation to improve the general and financial management of the federal 

government. The combination of reforms ushered in by the (1) CFO Act of 

1990, (2) Government Performance and Results Act of 1993,9

7

Pub. L. No. 97-255, 96 Stat. 814 (Sept. 8, 1982), now codified at 31 U.S.C. 3512 (c),(d).

8

GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1

(Washington, D.C.: November 1999).

9

Pub. L. No. 103-62, 107 Stat. 285 (Aug. 3, 1993).
Page 7 GAO-05-881 FFMIA FY 2004 Results

(3) Government Management Reform Act of 1994,10 (4) FFMIA, (5) ClingerCohen Act of 1996,11 (6) Accountability of Tax Dollars Act of 2002,12 and

(7) Department of Homeland Security Financial Accountability Act of 

2004,13 if successfully implemented, provides a solid foundation for 

improving the accountability of government programs and operations as 

well as for routinely producing valuable cost and operating performance 

information. These financial management reform acts emphasize the 

importance of improving financial management across the federal 

government. 

In particular, building on the foundation laid by the CFO Act, FFMIA 

emphasizes the need for agencies to have systems that are able to generate 

reliable, useful, and timely information for decision-making purposes and 

to ensure accountability on an ongoing basis. FFMIA requires the 

departments and agencies covered by the CFO Act to implement and 

maintain financial management systems that comply substantially with

(1) federal financial management systems requirements, (2) applicable 

federal accounting standards,14 and (3) the SGL15 at the transaction level. 

FFMIA also requires auditors to state in their CFO Act financial statement 

audit reports whether the agencies’ financial management systems 

substantially comply with FFMIA’s systems requirements. Appendixes I 

through IV include details on the various requirements and standards that 

support federal financial management.

10Pub. L. No. 103-356, 108 Stat. 3410 (Oct. 13, 1994).

11Pub. L. No. 104-106, div. E, 110 Stat. 186, 679 (Feb. 10, 1996).

12The Accountability of Tax Dollars Act of 2002 extends the requirement to prepare and 

submit audited financial statements to most executive agencies not subject to the CFO Act 

unless they are exempted by OMB. However, these agencies are not required to have 

systems that are compliant with FFMIA. 

13Pub. L. No. 108-330, 118 Stat. 1275 (Oct. 16, 2004).

14The American Institute of Certified Public Accountants recognizes the federal accounting 

standards promulgated by the Federal Accounting Standards Advisory Board as generally 

accepted accounting principles. For a further description of federal accounting standards, 

see app. I.

15The SGL provides a standard chart of accounts and standardized transactions that 

agencies are to use in all their financial systems. 
Page 8 GAO-05-881 FFMIA FY 2004 Results

Guidance for FFMIA 

Issued by OMB 

OMB establishes governmentwide financial management policies and 

requirements and has issued two sources of guidance related to FFMIA 

reporting. First, OMB Bulletin No. 01-02, Audit Requirements for Federal 

Financial Statements, dated October 16, 2000, prescribes specific 

language auditors should use when reporting on an agency system’s 

substantial compliance with FFMIA. Specifically, this guidance calls for 

auditors to provide negative assurance when reporting on an agency 

system’s FFMIA compliance. Second, in OMB Memorandum, Revised 

Implementation Guidance for the Federal Financial Management 

Improvement Act (Jan. 4, 2001), OMB provides guidance for agencies and 

auditors to use in assessing substantial compliance. The guidance 

describes the factors that should be considered in determining whether an 

agency’s systems substantially comply with FFMIA’s requirements. Further, 

the guidance provides examples of the types of indicators that should be 

used as a basis for assessing whether an agency’s systems are in substantial 

compliance with each of the three FFMIA requirements. Finally, the 

guidance discusses the corrective action plans, to be developed by agency 

heads, for bringing their systems into compliance with FFMIA. 

Financial Audit 

Manual Section on 

FFMIA Developed by 

GAO and PCIE

We have worked in partnership with representatives from the President’s 

Council on Integrity and Efficiency (PCIE) to develop and maintain the 

joint GAO/PCIE Financial Audit Manual (FAM). The FAM provides 

specific procedures auditors should perform when assessing FFMIA 

compliance.16 As detailed in appendix V, we have also issued a series of 

checklists to help assess whether agencies systems meet systems 

requirements. The FAM guidance on FFMIA assessments recognizes that 

while financial statement audits offer some assurance regarding FFMIA 

compliance, auditors should design and implement additional testing to 

satisfy FFMIA criteria. For example, in performing financial statement 

audits, auditors generally focus on the ability of the financial management 

systems to process and summarize financial information that flows into 

annual agency financial statements. In contrast, FFMIA requires auditors to 

assess whether an agency’s financial management systems comply with 

system requirements, accounting standards, and the SGL. To do this, 

auditors need to consider whether agency systems provide reliable, useful, 

and timely information for managing day-to-day operations so that agency 

managers would have the necessary information to measure performance 

16GAO-01-765G, sections 701, 701A, 701B, and 260.58-.60. 
Page 9 GAO-05-881 FFMIA FY 2004 Results

on an ongoing basis rather than just at year-end. Further, OMB’s current 

audit guidance17 calls for financial statement auditors to review 

performance information for consistency with the financial statements, but 

does not require auditors to determine whether such information is 

available to managers for day-to-day decision making as called for by the 

FAM guidance for testing compliance with FFMIA. 

Scope and 

Methodology

We reviewed the fiscal year 2004 financial statement audit reports for the 

23 CFO Act agencies to identify the auditors’ assessments of agency 

financial systems’ compliance and the problems that affect FFMIA 

compliance. We also reviewed the fiscal year 2004 financial statement audit 

report for DHS to identify any FFMIA-related issues. Prior experience with 

the auditors and our review of their reports provided the basis for 

determining the sufficiency and relevancy of evidence provided in these 

documents. Based on the audit reports, we identified problems reported by 

the auditors that affect agency systems’ compliance with FFMIA. The 

problems identified in these reports are consistent with long-standing 

financial management weaknesses we have reported based on our work at 

a number of agencies. However, we caution that the occurrence of 

problems in a particular category may be even greater than auditors’ 

reports of FFMIA noncompliance would suggest, because auditors may not 

have included all problems in their reports. Finally, we held discussions 

with OMB officials to obtain information about their current efforts to 

improve federal financial management and address our prior 

recommendations related to FFMIA. 

We conducted our work in the Washington, D.C. area from February 2005 

through May 2005 in accordance with U.S. generally accepted government 

auditing standards. We requested comments on a draft of this report from 

the Director of OMB or his designee. We received written comments from 

the OMB Controller. OMB’s comments are discussed in the Agency 

Comments and Our Evaluation section and reprinted in appendix VI. 

17OMB Bulletin No. 01-02, Audit Requirements for Federal Financial Statements (Oct. 16, 

2000).
Page 10 GAO-05-881 FFMIA FY 2004 Results

Systems Weaknesses 

Continue to Impede 

Financial Management 

Accountability

While agencies have made demonstrable progress in producing auditable 

financial statements and some progress in addressing their financial 

management systems weaknesses, the majority of agencies’ systems are 

still not substantially compliant with FFMIA’s requirements. Figure 2 

summarizes auditors’ assessments of FFMIA compliance for fiscal years 

2000 through 2004 and suggests that the instances of noncompliance with 

FFMIA’s three requirements have remained fairly constant. For fiscal year 

2004, offices of inspectors general (OIG) and their contract auditors 

reported that the systems of 16 of the 23 CFO Act agencies did not 

substantially comply with at least one of FFMIA’s three requirements—

federal financial management systems requirements, applicable federal 

accounting standards, or the SGL at the transaction level.18

18Of these 16 agencies, auditors for 9 agencies reported that their agencies’ systems were not 

in substantial compliance with all three FFMIA requirements. 
Page 11 GAO-05-881 FFMIA FY 2004 Results

Figure 2: Auditors’ FFMIA Assessments for Fiscal Years 2000 through 2004

Note: See appendix VII for details on agencies’ compliance with FFMIA requirements.

In fiscal year 2004, auditors for six agencies—the Department of 

Commerce (Commerce), the Department of Energy (Energy), the 

Environmental Protection Agency (EPA), the General Services 

Administration (GSA), the National Science Foundation (NSF), and the 

Social Security Administration (SSA)—provided negative assurance that 

the agencies’ financial systems were in compliance with FFMIA. In 

addition, for the first time, auditors for one agency, DOL, provided positive 

assurance that its systems were in compliance with FFMIA. In contrast, in 

fiscal year 2003, the auditors for Commerce, Energy, EPA, the Nuclear 

Regulatory Commission (NRC), NSF, and SSA reported that the results of 

their tests disclosed no instance in which their financial management 

systems did not meet FFMIA requirements. 

At the NRC, the auditors determined that the financial management 

systems did not comply with the requirements of FFMIA in fiscal year 2004, 

although they had previously determined that the systems were in 

compliance in fiscal year 2003. The change was due to audit tests 

0

5

10

15

20

CFO Act agencies not in compliance

2000 2001 2002 2003 2004

System requirements

Accounting standards

SGL

18

19

17

15

11

10

16

11 11

14

13

8

9

12

8

Source: GAO analysis, based on independent auditors' reports prepared by agency inspectors general and contract auditors for 

fiscal years 2000-2004.
Page 12 GAO-05-881 FFMIA FY 2004 Results

performed on NRC’s fee billing system in fiscal year 2004. As a result of 

their tests, the auditors concluded that the billing system lacked sound 

internal controls and does not comply with existing requirements for 

revenue systems. At GSA, the auditors provided negative assurance that the 

financial management systems were FFMIA-compliant in fiscal year 2004, 

although they had previously determined that the systems were not in 

compliance for fiscal year 2003 due to significant reconciliation problems. 

For fiscal year 2004, the GSA auditors closed the material weakness 

regarding the significant reconciliation problems that had affected GSA the 

prior year. 

DHS will be subject to FFMIA for the first time in fiscal year 2005. The 

Department of Homeland Security Financial Accountability Act19 added 

DHS to the list of CFO Act agencies effective for fiscal year 2005. Because 

DHS was not subject to FFMIA in fiscal year 2004, we have not included 

DHS in our summaries of compliance with FFMIA and problems reported 

by the auditors for fiscal year 2004. However, we have noted that the DHS 

auditors identified and reported deficiencies that relate to all three FFMIA 

requirements. We plan to include DHS in our analysis of the fiscal year 2005 

FFMIA results. 

While substantially more CFO Act agencies have obtained clean or 

unqualified audit opinions on their financial statements, as shown in figure 

2, the underlying agency financial systems remain a serious problem. The 

number of unqualified opinions has increased over the past 8 years (from 

11 in fiscal year 1997 to 18 for fiscal year 2004), and most agencies were 

able to issue their audited financial statements within the accelerated 

reporting time frame—22 of the 23 CFO Act agencies20 issued their audited 

financial statements by the November 15, 2004, deadline set by OMB, just 

46 days after the close of the fiscal year. While the increase in unqualified 

and timely opinions is noteworthy, we are concerned over the growing 

number of CFO Act agencies that have restated certain of their financial 

statements for fiscal year 2003 to correct errors and have included a matter 

of emphasis paragraph in our report on the audit of the fiscal year 2004 

consolidated financial statements given the seriousness of this problem. As

19Pub. L. No. 108-330, 118 Stat. 1275 (Oct. 16, 2004).

20The Department of Health and Human Services’ Fiscal Year 2004 Performance and 

Accountability Report was issued in December 2004.
Page 13 GAO-05-881 FFMIA FY 2004 Results

we have previously testified,21 at least 1122 of the 23 CFO Act agencies 

restated their fiscal year 2003 financial statements, whereas 523 CFO Act 

agencies restated their fiscal year 2002 financial statements. The 

restatements to CFO Act agencies’ fiscal year 2003 financial statements 

ranged from correcting two line items on one agency’s balance sheet to 

numerous line items on several of another agency’s financial statements. 

The amounts of the agencies’ restatements ranged from several million 

dollars to over $91 billion. Nine24 of those 11 agencies received unqualified 

opinions on their financial statements originally issued in fiscal year 2003. 

Seven of the 9 auditors issued unqualified opinions on the restated financial 

statements, which in substance replace the auditors’ opinions on their 

respective agencies’ original fiscal year 2003 financial statements. For 225 of 

these 9 agencies, the auditors not only withdrew their unqualified opinions 

on the fiscal year 2003 financial statements but also issued other than 

unqualified opinions on their respective agencies’ restated fiscal year 2003 

financial statements because they could not determine whether there were 

any additional misstatements and the effect that these could have on the 

restated fiscal year 2003 financial statements. 

For two of the agencies with restated financial statements, auditors 

provided negative assurance that the agencies’ systems were in compliance 

with FFMIA for fiscal year 2003. The restatements at these agencies 

reflected inaccurate recording of transactions, and in one case, the cause 

for the restatement could be traced back to the implementation of new 

software, among other factors. The necessity for these agencies to restate 

certain financial accounts in the subsequent fiscal year raises questions 

about whether the agencies systems substantially met FFMIA requirements 

and whether financial managers had access to reliable, useful, and timely 

21GAO, Fiscal Year 2004 U.S. Government Financial Statements: Sustained Improvement 

in Federal Financial Management Is Crucial to Addressing Our Nation’s Future Fiscal 

Challenges, GAO-05-284T (Washington, D.C.: Feb. 9, 2005).

22Departments of Agriculture, Defense, Health and Human Services, Justice, State, and 

Transportation and GSA, NSF, NRC, the Office of Personnel Management, and the Small 

Business Administration. 

23Departments of Agriculture, Health and Human Services, the Interior, Transportation, and 

the Treasury.

24GSA, NSF, NRC, Office of Personnel Management (OPM), and the Departments of 

Agriculture, Health and Human Services, Justice, State, and Transportation.

25NRC and the Department of Justice.
Page 14 GAO-05-881 FFMIA FY 2004 Results

information with which to make fully informed operational decisions in 

fiscal year 2003.

The need for restatements and end-of-the-year adjustments to correct for 

errors undermines public trust and confidence in both the entity and all 

responsible parties and indicates a continuing lack of improvement in the 

underlying agency financial systems. Undue emphasis on receiving 

unqualified or clean audit opinions has led to an expectation gap since, as 

more agencies receive clean opinions, public expectations are raised that 

the government has sound financial management and can produce reliable, 

useful, and timely information on demand throughout the year, whereas the 

annual FFMIA assessments offer a different perspective. 

FFMIA Compliance 

Findings Mostly Based 

on Negative Assurance 

In fiscal year 2004 auditors for seven agencies reported their systems to be 

in substantial compliance with the requirements of FFMIA. Auditors for six 

of these agencies (Commerce, Energy, EPA, NRC, NSF, and SSA) provided 

negative assurance that the agencies’ systems were in compliance with 

FFMIA. Auditors provide negative assurance when they state that nothing 

came to their attention during the course of their planned procedures to 

indicate that these agencies’ financial management systems did not meet 

FFMIA requirements. If readers are not familiar with the concept of 

negative assurance, which we believe is generally the case, they may 

incorrectly assume that these systems have been fully tested by the 

auditors and that the agencies have achieved compliance. OMB’s current 

audit guidance26 only calls for auditors to provide negative assurance when 

reporting whether an agency’s systems are in substantial compliance with 

FFMIA. 

To provide positive assurance of FFMIA compliance, auditors need to 

perform more comprehensive audit procedures than those necessary to 

render an opinion for a financial statement audit. In performing financial 

statement audits, auditors generally focus on the capability of the financial 

management systems to process and summarize financial information that 

flows into financial statements. In contrast, FFMIA is much broader and 

requires auditors to assess whether an agency’s financial management 

systems substantially comply with systems requirements. To do this, 

auditors need to consider whether agency systems provide complete, 

26OMB Bulletin No. 01-02, Audit Requirements for Federal Financial Statements (Oct. 16, 

2000).
Page 15 GAO-05-881 FFMIA FY 2004 Results

accurate, and timely information for day-to-day decision making and 

management. 

In fiscal year 2004, auditors for DOL provided an opinion, or positive 

assurance, of DOL’s financial management systems’ compliance with 

FFMIA. At DOL, the Inspector General (IG) contracted with an 

independent public accounting firm to perform the FFMIA examination in 

accordance with American Institute of Certified Public Accountants 

attestation standards, which by reference are incorporated in Government 

Auditing Standards. To do so, the auditors used a combination of financial 

statement and FFMIA-specific audit procedures. Specifically, they 

performed extensive transaction testing and reconciliations combined with 

FFMIA-related audit procedures based on the GAO/PCIE FAM 

requirements. For example, they developed a good understanding of the 

financial systems capabilities, documented their assessments of DOL’s 

financial systems’ compliance with systems requirements, and considered 

the nature and extent of managerial cost information available for effective 

day-to-day management.

According to the auditors, two developments at DOL in fiscal year 2004 

were key to the ability of the auditors to conclude that DOL systems 

substantially complied with the three requirements of FFMIA for fiscal year 

2004. First, during fiscal year 2004, DOL management assigned staff the 

responsibility of reconciling the Fund Balance with Treasury (FBWT)27

accounts on a daily basis. Due to this increased focus on FBWT, at the end 

of fiscal year 2004, the auditors found no material differences between DOL 

and Treasury’s records. Second, DOL implemented a cost management 

system during fiscal year 2004 in order to provide current year cost data to 

managers that has not been available in prior years. The auditors also 

determined that none of the internal control deficiencies reported as part 

of the financial statement audit indicated substantial noncompliance with 

FFMIA requirements. For the fiscal year 2005 financial statement audit, the 

auditors plan to increase their focus on the types of reports being produced 

currently by the cost system and how managers are using that information 

for day-to-day operations. In addition, the fiscal year 2005 DOL audit plan 

requires the auditors to perform the FFMIA-related FAM audit procedures 

and complete the associated checklists. 

27Agencies record their budget spending authorizations in their FBWT accounts. Agencies 

increase or decrease these accounts as they collect or disburse funds. 
Page 16 GAO-05-881 FFMIA FY 2004 Results

The efforts by the DOL auditors to perform the level of review necessary to 

provide positive assurance of FFMIA compliance in fiscal year 2004 is most 

noteworthy. We have discussed the importance of providing positive 

assurance on FFMIA as required by the act for a number of years. We look 

forward to other agencies adopting similar auditing and reporting practice. 

Providing positive assurance of an agency’s financial management system 

can identify weaknesses and lead to improvements that enhance the 

performance, productivity, and efficiency of federal financial management 

systems. It also provides a clear “bottom line,” whereas negative assurance 

does not do so. Therefore, as we have discussed in prior reports,28 we 

reaffirm our prior recommendation that OMB require agency auditors to 

provide a statement of positive assurance when reporting an agency’s 

systems to be in substantial compliance with FFMIA. OMB continues to 

support the requirement for negative assurance of FFMIA compliance. 

While OMB agrees that testing should occur, and its guidance on FFMIA 

calls for it, OMB officials stated that different, more coordinated 

approaches toward assessing an agency’s internal controls and FFMIA 

compliance might provide sufficient assurance on an agency’s systems. For 

example, in preparing the President’s Management Agenda (PMA) 

scorecard assessments, OMB officials meet with agencies to discuss a 

number of financial management issues and have systems demonstrations. 

Agencies are asked to identify key business questions and related cost 

drivers. Then, the agencies must develop systems that can produce the 

information needed on those cost drivers to help management at all levels 

focus on results. OMB officials stated that they believed the PMA scorecard 

framework offers an alternate route toward substantial compliance that is 

similar to that offered by positive assurance. In its written comments on a 

draft of this report (see app. VI), OMB stated that the processes used in 

evaluating agencies against the PMA standards can provide a corroborative 

mechanism in evaluating compliance with FFMIA. Our concern is that the 

information provided by this approach does not come under audit scrutiny, 

which is what the law requires, and may not be reliable.

In December 2004, OMB revised Circular No. A-123, Management’s 

Responsibility for Internal Control, to strengthen the requirements for 

conducting management’s assessment of internal control over financial 

reporting. The revision incorporates the internal control requirements for 

publicly traded companies that are contained in the Sarbanes-Oxley Act of 

28GAO-02-29, GAO-03-31, GAO-03-1062, and GAO-05-20.
Page 17 GAO-05-881 FFMIA FY 2004 Results

2002.29 The circular emphasized management’s responsibility for 

establishing, maintaining, and reporting on internal control to achieve the 

objectives of effective and efficient operations, reliable financial reporting, 

and compliance with laws and regulations. In commenting on a draft of this 

report, OMB emphasized that through its revision to Circular No. A-123, 

agencies are required to implement more rigorous processes for 

conducting management’s assessment of the effectiveness of internal 

controls over financial reporting. Given that PMA and Circular No. A-123 

reviews help to ensure agencies’ access to and use of timely and accurate 

financial data, OMB believes that requiring a statement of positive 

assurance would prove only marginally useful.

From our perspective, auditor reporting on internal control is a critical 

component of monitoring the effectiveness of an organization’s 

accountability, especially for large, complex, or challenged entities. 

Auditors can better serve their clients and other financial statement users 

and better protect the public interest by having a greater role in providing 

assurances of the effectiveness of internal control in deterring fraudulent 

financial reporting and protecting assets. Financial management systems 

are a critical element of an entity’s internal control over financial reporting. 

Although enhanced internal control reporting would not necessarily 

address the full capability of the financial management systems in place, 

such reporting would include reportable internal control weaknesses 

caused by financial systems problems. However, the full value of 

independent auditors’ assessments of FFMIA compliance will not be fully 

realized until auditors perform a sufficient level of audit work to be able to 

provide positive assurance that agencies are in compliance with FFMIA as 

called for in the act. When reporting an agency’s financial management 

systems to be in substantial compliance, positive assurance from 

independent auditors will provide users with confidence that the agency 

systems provide the reliable, useful, and timely information envisioned by 

the act. 

29A final rule issued by the Securities and Exchange Commission that took effect in August 

2003 provides guidance for implementations of Sections 302, 404, and 906 of the SarbanesOxley Act of 2002 (Pub. L. No. 107-204, §§302, 404, 906 116 Stat. 745, 777, 789, 806 (July 30, 

2002)), which requires publicly traded companies to establish and maintain an adequate 

internal control structure and procedures for financial reporting and include in the annual 

report a statement of management’s responsibility for and assessment of the effectiveness 

of those controls and procedures in accordance with standards adopted by the Securities 

and Exchange Commission. 
Page 18 GAO-05-881 FFMIA FY 2004 Results

In addition, we also reaffirm our previous recommendation that OMB 

explore clarifying the definition of “substantial compliance” to help ensure 

consistent application of the term. As we noted in our prior reports, 

auditors we interviewed had concerns about providing positive assurance 

in reporting on agency systems’ FFMIA compliance because of a need for 

clarification regarding the meaning of substantial compliance. In its 

comments, OMB stated that its growing experience helping agencies 

implement the PMA enables it to refine the existing FFMIA indicators 

associated with substantial compliance. Accordingly, OMB said it would 

consider our recommendation in any future policy and guidance updates.

Reasons for 

Noncompliance 

Based on our review of the fiscal year 2004 audit reports for the 16 agencies 

reported to have systems not in substantial compliance with one or more of 

FFMIA’s three requirements, we identified six primary reasons cited by the 

auditors for agency systems not being compliant. The weaknesses reported 

by the auditors ranged from serious, pervasive systems problems to less 

serious problems that may affect only one aspect of an agency’s accounting 

operation:

• nonintegrated financial management systems,

• inadequate reconciliation procedures,

• lack of accurate and timely recording of financial information,

• noncompliance with the SGL,

• lack of adherence to federal accounting standards, and

• weak security controls over information systems.

Figure 3 shows the relative frequency of these problems at the 16 agencies 

reported to have noncompliant systems. The same six types of problems 

have been cited by auditors in their fiscal years 2000 through 2003 audit 

reports, although the auditors may not have reported these problems as 

specific reasons for their systems’ lack of substantial compliance with 

FFMIA. In addition, we caution that the occurrence of problems in any 

particular category may be even greater than auditors’ reports of FFMIA 

noncompliance would suggest because auditors may not have identified all 

problems in their reviews. 
Page 19 GAO-05-881 FFMIA FY 2004 Results

Figure 3: Problems Reported by Auditors for Fiscal Years 2000 through 2004

Nonintegrated Financial 

Management Systems

The CFO Act calls for agencies to develop and maintain integrated 

accounting and financial management systems30 that comply with federal 

systems requirements and provide for (1) complete, reliable, consistent, 

and timely information that is responsive to the financial information needs 

of the agency and facilitates the systematic measurement of performance; 

(2) the development and reporting of cost management information; and 

13

16

14

8

12

19

14

13

14

15

16

8

14

20

13

11 11 11

10

11

12

11 11

15

11

17 17

9

13

19

0

4

8

12

16

20

24

Nonintegrated

financial 

management

systems

Inadequate

reconciliation

procedures

Lack of accurate 

and timely 

recording

Noncompliance 

with the SGL

Lack of adherence 

to federal accounting 

standards

Weak security 

over information 

systems

Agencies

Fiscal year 2000

Fiscal year 2001

Fiscal year 2002

Fiscal year 2003

Fiscal year 2004

Source: GAO analysis, based on independent auditors' reports prepared by agency inspectors general and contract auditors for 

fiscal years 2000-2004.

30Federal financial system requirements define an integrated financial system as one that 

coordinates a number of previously unconnected functions to improve overall efficiency 

and control. Characteristics of such a system include (1) standard data classifications for 

recording financial events; (2) common processes for processing similar transactions; 

(3) consistent control over data entry, transaction processing, and reporting; and (4) a 

system design that eliminates unnecessary duplication of transaction entry. 
Page 20 GAO-05-881 FFMIA FY 2004 Results

(3) the integration of accounting, budgeting, and program information. 

OMB Circular No. A-127, Financial Management Systems, requires 

agencies to establish and maintain a single integrated financial 

management system that conforms to functional requirements published 

by JFMIP’s Program Management Office (PMO). More details on the 

financial management systems requirements can be found in appendixes I 

and II.

The lack of integrated financial management systems typically results in 

agencies expending major effort and resources, including in some cases 

hiring external consultants, to develop information that their systems 

should be able to provide on a daily or recurring basis. Agencies with 

nonintegrated financial systems are also more likely to devote more time 

and resources to collecting information than those with integrated systems. 

In addition, opportunities for errors are increased when agencies’ systems 

are not integrated. 

Auditors frequently mentioned the lack of integrated financial management 

systems in their fiscal year 2004 audit reports. As shown in figure 3, 

auditors for 12 of the 16 agencies with noncompliant systems reported this 

to be a problem, compared with 11 of the 17 agencies reported with 

noncompliant systems in fiscal year 2003. For example, auditors for the 

Department of Justice reported that the financial management systems of 

the department’s component agencies are not integrated or configured to 

support financial management and reporting. For instance, the U.S. 

Marshals Service’s core financial system lacks integrated subsidiary ledgers 

for certain key account balances. Consequently, staff at this organization 

must perform time-consuming manual procedures to document 

adjustments and crosswalks between the general ledger and the financial 

statements. However, the limited amount of time available at the end of 

each financial reporting period increases the risk that errors existing in the 

financial statements were not detected and corrected prior to final 

issuance. The auditors also noted that the nonintegrated systems do not 

support management’s need for timely and accurate information for day-today decision making.

At the National Aeronautics and Space Administration (NASA), auditors 

reported numerous weaknesses in the core financial system, the integrated 

financial management system first implemented by NASA in fiscal year 

2003. We have previously reported on problems NASA faced when
Page 21 GAO-05-881 FFMIA FY 2004 Results

implementing this system.31 Specifically, the auditors found that the core 

financial system lacked integration with certain key subsidiary systems, 

such as the property system, and does not facilitate the preparation of 

financial statements. Although the auditors recognized that management 

identified and resolved significant system problems in fiscal year 2004, the 

auditors identified serious continuing weaknesses in their review of 

property, plant, and equipment (PP&E)—specifically contractor-held 

PP&E. For example, due to a lack of integration with the property system, 

entries for contractor-held property, totaling $8.5 billion, had to be 

manually entered into the core financial system. The auditors concluded 

that the problems will not be fully addressed until NASA implements a 

single integrated system for reporting property and develops a 

methodology to identify costs that should be capitalized at the time that 

transactions are processed. The auditors further noted that certain 

transactions continue to be posted incorrectly due to improper 

configurations within the system. Consequently, they concluded that NASA 

lacks an integrated financial management system that provides effective 

and efficient interrelationships between software, hardware, personnel, 

procedures, controls, and data. 

Inadequate Reconciliation 

Procedures

A reconciliation process, whether manual or automated, is a necessary and 

valuable part of a sound financial management system. The less integrated 

the financial management system, the greater the need for adequate 

reconciliations because data are being accumulated from a number of 

different sources. Reconciliations are needed to ensure that data have been 

recorded properly between the various systems and manual records. The 

Comptroller General’s Standards for Internal Control in the Federal 

Government highlights reconciliation as a key control activity. 

31GAO, Business Modernization: Improvements Needed in Management of NASA’s 

Integrated Financial Management Program, GAO-03-507 (Washington, D.C.: Apr. 30, 2003); 

Information Technology: Architecture Needed to Guide NASA’s Financial Management 

Modernization, GAO-04-43 (Washington, D.C.: Nov. 21, 2003); Business Modernization: 

Disciplined Processes Needed to Better Manage NASA’s Integrated Financial Management 

Program, GAO-04-118 (Washington, D.C.: Nov. 21, 2003); Business Modernization: NASA’s 

Integrated Financial Management Program Does Not Fully Address Agency’s External 

Reporting Issues, GAO-04-151 (Washington, D.C.: Nov. 21, 2003); Business Modernization: 

NASA’s Challenges in Managing Its Integrated Financial Management Program, GAO-04-

255 (Washington, D.C.: Nov. 21, 2003); and National Aeronautics and Space 

Administration: Significant Actions Needed to Address Long-standing Financial 

Management Problems, GAO-04-754T (Washington, D.C.: May 19, 2004).
Page 22 GAO-05-881 FFMIA FY 2004 Results

As shown in figure 3, auditors for 11 of the 16 agencies with noncompliant 

systems reported that the agencies had reconciliation problems, including 

difficulty in reconciling their FBWT accounts with Treasury’s records, 

compared with 11 of the 17 agencies reported with noncompliant systems 

in fiscal year 2003. Treasury policy requires agencies to reconcile their 

accounting records with Treasury records on a monthly basis (comparable 

to individuals reconciling their personal checkbooks to their monthly bank 

statements). 

For example, in fiscal year 2003, auditors for the Department of 

Transportation (DOT) reported that the department had not implemented 

effective processes to reconcile transactions with other federal agencies. 

During fiscal year 2004, DOT did improve its reconciliation procedures 

using a new reporting tool within its financial management system. 

However, on September 30, 2004, DOT still had not identified agencies 

associated with $27 billion, or about half, of the $55 billion of transactions 

with other federal agencies that were processed and reported to Treasury 

in fiscal year 2004. The large amount associated with unknown trading 

partners demonstrates that DOT still lacks an effective process for 

reconciling transactions. Furthermore, DOT lacked an effective process for 

reconciling transactions among its own subsidiary agencies. In fiscal year 

2004, DOT’s subsidiary agencies reported a total of $17 million in accounts 

receivable, or amounts due from other departmental agencies. These same 

organizations, however, reported $582 million in accounts payable, or 

amounts owed to other departmental agencies. Because these amounts 

should reflect only transactions within DOT, at the consolidated agency 

level the amount due should match the amount owed. Due to this 

discrepancy, DOT management had to perform extensive research and 

make numerous manual adjustments to balance its records and prepare 

reliable financial statements. 

Until DOT is able to automatically track transactions with other federal 

agencies and between its own subsidiary agencies, it will not be able to 

make significant progress in reconciling its transaction balances internally 

and with those of other agencies. As a result of these problems at DOT and 

other federal agencies, the federal government’s ability to determine the 

impact of these differences on the amounts reported in the consolidated 

financial statements is impaired, which we cite in our audit report on the 

U.S. government’s consolidated financial statements as one of three major 

impediments to providing an opinion on those financial statements. 

Resolving the intragovernmental transactions problem remains a difficult 
Page 23 GAO-05-881 FFMIA FY 2004 Results

challenge and will require a commitment by federal agencies and strong 

leadership and oversight by OMB.

Lack of Accurate and Timely 

Recording of Financial 

Information 

As shown in figure 3, auditors for all 16 of the agencies with noncompliant 

systems reported the lack of accurate and timely recording of financial 

information as a problem for fiscal year 2004, compared with 15 of the 17 

agencies reported with noncompliant systems in fiscal year 2003. Accurate 

and timely recording of financial information is essential for successful 

financial management. Timely recording of transactions facilitates accurate 

reporting in agencies’ financial reports and other management reports used 

to guide managerial decision making. In addition, having systems that 

record information in an accurate and timely manner is critical for key 

governmentwide initiatives, such as integrating budget and performance 

information. 

In contrast, untimely recording of transactions during the fiscal year can 

result in agencies making substantial efforts at fiscal year-end to perform 

extensive manual financial statement preparation efforts that are 

susceptible to error and increase the risk of misstatements. For example, 

auditors for the U.S. Department of Agriculture (USDA) reported that the 

department had to make about 1,800 closing adjustments, totaling billions 

of dollars, to the financial statements at year-end. The auditors noted that 

most of the adjustments they reviewed were necessary; however, having to 

make numerous adjustments at year-end diminished the utility of the 

financial data in assisting managers in administering USDA programs and 

operations throughout the year. 

In another case, the Department of Defense’s (DOD) auditors reported that 

the Defense Finance and Accounting Service in Indianapolis made 

$204.8 billion (excluding adjustments for intragovernmental transactions) 

in unsupported accounting entries to prepare the fiscal year 2004 Army 

General Fund financial statements. Since these adjustments were 

unsupported, it was difficult for auditors to assess the accuracy of the 

transactions and account balances, and was one of a number of financial 

statement material weaknesses that led DOD auditors to disclaim an 

opinion on DOD’s fiscal year 2004 financial statements.

Noncompliance with the 

SGL 

As shown in figure 3, auditors for 11 of the 16 agencies with noncompliant 

systems reported that the agencies’ systems did not comply with SGL 

requirements for fiscal year 2004, compared with 10 of the 17 agencies 
Page 24 GAO-05-881 FFMIA FY 2004 Results

reported with noncompliant systems in fiscal year 2003. FFMIA specifically 

requires federal agencies to implement the SGL at the transaction level. 

Using the SGL promotes consistency in financial transaction processing 

and reporting by providing a uniform chart of accounts and pro forma 

transactions and provides a basis for comparison at the agency and 

governmentwide levels. The defined accounts and pro forma transactions 

standardize the accumulation of agency financial information as well as 

enhance financial control and support financial statement preparation and 

other external reporting. 

By not implementing the SGL, agencies may experience difficulties in 

providing consistent financial information across their components and 

functions. For example, auditors for the Department of Health and Human 

Services (HHS) found that approximately 1,550 nonstandard accounting 

entries with an absolute value of almost $30 billion were recorded in HHS’ 

Program Support Center’s32 CORE accounting system to compensate for 

noncompliance with the SGL. These nonstandard accounting entries were 

recorded to correct for misstatements, to record reclassifications, and to 

correct reported balances. The auditors noted that these amounts were 

significantly less than those in fiscal year 2003, when approximately 2,300 

nonstandard accounting entries were recorded with an absolute value of 

about $41 billion.

In another instance, auditors for the U.S. Agency for International 

Development (USAID) found that the agency’s overseas missions continue 

to use the Mission Accounting and Control System (MACS) as their primary 

financial system. MACS is a computer-based system that does not 

substantially comply with FFMIA’s SGL requirement since it lacks the SGL 

chart of accounts. Instead, the system uses transaction codes to record 

entries; therefore, USAID cannot ensure that transactions are posted 

properly and consistently from mission to mission.

Lack of Adherence to 

Federal Accounting 

Standards

One of FFMIA’s requirements is that agencies’ financial management 

systems account for transactions in accordance with federal accounting 

standards; however, agencies continue to face significant challenges in 

implementing these standards. As shown in figure 3, auditors for 11 of the 

32The Program Support Center (PSC) is an administrative office, which provides program 

support services to 8 of HHS’ 12 operating divisions. The CORE accounting system has been 

described as the “nucleus” of PSC’s accounting operations.
Page 25 GAO-05-881 FFMIA FY 2004 Results

16 agencies with noncompliant systems reported that these agencies had 

problems complying with one or more federal accounting standards for 

fiscal year 2004, compared with 11 of the 17 agencies reported with 

noncompliant systems in fiscal year 2003. Appendixes III and IV list the 

federal financial accounting standards and other guidance issued by the 

Federal Accounting Standards Advisory Board and its Accounting and 

Auditing Policy Committee, respectively. 

Auditors expressly reported compliance problems with 11 specific 

accounting standards in fiscal year 2004. Of those standards, the 4 that 

were most troublesome for agencies are Statement of Federal Financial 

Accounting Standards (SFFAS) No. 1, Accounting for Selected Assets and 

Liabilities; SFFAS No. 4, Managerial Cost Accounting Concepts and 

Standards; SFFAS No. 6, Accounting for Property, Plant, and Equipment; 

and SFFAS No. 7, Accounting for Revenue and Other Financing Sources. 

In particular, SFFAS No. 4, which became effective in 1998, continues to be 

difficult for federal managers to fully implement. For example, as auditor 

for the Department of the Treasury’s Internal Revenue Service (IRS),33 we 

reported that during fiscal year 2004 IRS continued to lack a cost 

accounting system capable of accurately and timely tracking and reporting 

the costs of its programs and projects. This condition also renders IRS 

unable to produce reliable cost-based performance information. IRS 

officials stated that they have the information necessary to determine the 

cost of various activities, such as conducting investigations; however, this 

information is widely distributed among a variety of information systems 

that are not integrated and therefore cannot share data. This makes the 

accumulation of cost information time consuming and labor intensive, and 

thus such information is not readily available for decision-making 

purposes. Accurate and timely cost management information is critical for 

federal managers to transform how government agencies manage the 

business of government and vital in developing meaningful links between 

budget, accounting, and performance. The requirement for managerial cost 

information has been in place since 1990 under the CFO Act and since 

October 1997 as a federal accounting standard.

Similar system and process deficiencies also impede agency efforts to 

accurately and timely track and report the cost of their PP&E in 

accordance with SFFAS No. 6. For example, in its annual report on 

33GAO, Financial Audit: IRS’s Fiscal Years 2004 and 2003 Financial Statements, GAO-05-

103 (Washington, D.C.: Nov. 10, 2004).
Page 26 GAO-05-881 FFMIA FY 2004 Results

reliability, as required by section 1008 of the National Defense 

Authorization Act for Fiscal Year 2002,34 DOD acknowledged material 

deficiencies that impede its ability to reliably report the cost and 

depreciation of its general PP&E. Specifically, DOD disclosed a lack of

(1) supporting documentation for general PP&E purchased many years 

ago, (2) integrated acquisition and financial systems, and (3) systems 

designed to capture the acquisition and modification costs and calculate 

depreciation. The consequences of not complying with this accounting 

standard are also similar: management lacks accurate and timely 

information to adequately safeguard, account for, and control these assets.

Weak Security Controls over 

Information Systems

Information security weaknesses are a major concern for federal agencies 

and the general public and one of the frequently cited reasons for 

noncompliance with FFMIA. These control weaknesses place vast amounts 

of government assets at risk of inadvertent or deliberate misuse, financial 

information at risk of unauthorized modification or destruction, sensitive 

information at risk of inappropriate disclosure, and critical operations at 

risk of disruption. Accordingly, we have considered information security to 

be a governmentwide high-risk area since 1997.35 As shown in figure 3, 

auditors for 15 of the 16 agencies with noncompliant systems reported 

security weaknesses in information systems to be a problem, compared 

with all 17 of the agencies reported with noncompliant systems in fiscal 

year 2003. Consistent with section 1008 of the National Defense 

Authorization Act for Fiscal Year 2002, which requires DOD to minimize the 

use of resources to develop, compile, report, and audit unreliable financial 

statements, DOD auditors relied upon management’s assertion regarding 

DOD’s lack of compliance with federal financial management systems 

requirements. Accordingly, the DOD auditors limited their audit work and 

did not report information security weaknesses in their disclaimer report 

on DOD’s fiscal year 2004 financial statements. However, DOD 

management reported that in addition to being unable to provide 

information that is reliable, timely, and accurate, the department’s 

information systems are potentially vulnerable to an information warfare 

attack and reported this issue as a “significant deficiency” under the 

reporting requirements of the Federal Information Security Management

34Pub. L. No. 107-107, 115 Stat. 1012, 1204 (Dec. 28, 2001).

35GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: January 2005).
Page 27 GAO-05-881 FFMIA FY 2004 Results

Act of 2002.36 The DOD auditors advised us that they agree with DOD 

management’s acknowledgement of information security weaknesses. 

Therefore, we have included DOD in the summary of agencies with 

information security weaknesses. In addition, most of the agencies whose 

auditors provided negative assurance of substantial compliance with 

FFMIA still have computer security issues that need to be addressed by 

agency management.

Unresolved information security weaknesses could adversely affect the 

ability of agencies to produce accurate data for decision making and 

financial reporting because such weaknesses could compromise the 

reliability and availability of data that are recorded in or transmitted by an 

agency’s financial management system. As a case in point, in fiscal year 

2004, auditors for the Department of Veterans Affairs reported that 

program and financial data continue to be at risk due to (1) the 

implementation and enforcement of controls and oversight over access to 

information systems, (2) the segregation of key duties and responsibilities 

of employees, and (3) contingency planning. They concluded that these 

weaknesses placed sensitive information, including financial data and 

sensitive veteran medical and benefit information, at risk of inadvertent or 

deliberate misuse, fraudulent use, improper disclosure, or destruction, 

possibly without detection.

Key Initiatives That 

Impact Federal 

Financial Management 

Systems 

As agencies move forward with initiatives to address FFMIA-related 

problems, it is important that consideration be given to the numerous 

governmentwide initiatives under way to address long-standing financial 

management weaknesses. OMB continues to move forward on new 

initiatives to enhance financial management and provide results-oriented 

information in the federal government. Two notable developments in this 

area in fiscal year 2004 were the realignment of responsibilities formerly 

performed by JFMIP and its PMO and the development of financial 

management lines of business. Furthermore, the continuing leadership and 

support of Congress will be crucial to sustaining momentum in the 

reformation of financial management in the federal government. 

36Pub. L. No. 107-347, title III, 116 Stat. 2899, 2946 (Dec. 17, 2002).
Page 28 GAO-05-881 FFMIA FY 2004 Results

Changes to Federal 

Financial Management due 

to JFMIP Realignment

In a December 2004 memorandum, OMB announced a realignment of 

JFMIP’s responsibilities for financial management policy and oversight in 

the federal government. JFMIP was originally formed under the authority 

of the Budget and Accounting Procedures Act of 1950 and was a joint and 

cooperative undertaking of the General Accounting Office,37 the 

Department of the Treasury, OMB, and the Office of Personnel 

Management (OPM), working in cooperation with each other to improve 

financial management practices in the federal government. Leadership and 

program guidance was provided by the four principals of JFMIP—the 

Comptroller General of the United States, the Secretary of the Treasury, 

and the Directors of OMB and OPM. The PMO, managed by the Executive 

Director of JFMIP using funds provided by the CFO Council (CFOC), was 

established in 1999. The PMO was responsible for the testing and 

certification of commercial off-the-shelf (COTS) core financial systems for 

use by federal agencies and coordinating the development and publication 

of functional requirements for financial management systems.38

On December 1, 2004, in an effort to eliminate duplicative roles and 

streamline financial management improvement efforts, the four principals 

agreed to realign JFMIP’s responsibilities for financial management policy 

and oversight. Specifically, under the announced realignment, the PMO will 

now report to the chair of a new CFOC committee—the Financial Systems 

Integration Committee (FSIC). Other JFMIP functions, such as issuing 

systems requirements, were assumed by OMB’s Office of Federal Financial 

Management (OFFM) and the CFOC. While JFMIP ceased to exist as a 

separate organization, the Principals will continue to meet at their 

discretion consistent with the 1950 act.

The newly established FSIC will be responsible for advising OFFM on 

systems requirements and overseeing the PMO, which will continue 

certifying core financial systems. The realignment recognizes that OMB 

and the agencies have responsibility for all facets of financial management 

systems and the work of the FSIC will be critical to the success of the 

realignment. 

37Effective July 7, 2004, the General Accounting Office’s legal name became the Government 

Accountability Office to better reflect its role as a modern professional services 

organization. 

38See app. II for the systems requirements documents issued to date.
Page 29 GAO-05-881 FFMIA FY 2004 Results

Federal Financial 

Management Line of 

Business Initiative 

Continues to Evolve

In spring 2004, OMB launched task forces to conduct a governmentwide 

analysis of five lines of business supporting the President’s Management 

Agenda (PMA) goal to expand electronic government. The goal of the Line 

of Business (LOB) initiative is to develop business-driven, common 

solutions for five specific lines of business that extend across the entire 

federal government. The five lines of business are financial management, 

human resources management, grants, federal health architecture, and 

case management.39 These lines of business share similar business 

requirements and processes. In the spring of 2005, OMB added the 

Information Technology Security LOB task force. OMB and designated 

agency LOB task forces plan to use enterprise architecture-based 

principles and best practices to identify common solutions for business 

processes, technology-based shared services, or both to be made available 

to government agencies. Driven from a business perspective rather than a 

technology focus, the solutions are expected to address distinct business 

improvements to enhance government’s performance and services for 

citizens. 

The financial management LOB goals are to achieve or enhance process 

improvements and cost savings in the acquisition, development, 

implementation, and operation of financial management systems through 

shared services, joint procurements, consolidation, and other means; 

promote seamless data exchange between and among federal agencies; 

provide for the standardization of business processes and data elements; 

and strengthen internal controls through real-time integration of core 

financial and subsidiary systems. To achieve these goals, OMB and the 

associated agency task forces have focused on developing Centers of 

Excellence (COE). 

OMB officials stated that the purpose of developing COEs is to reduce the 

number of systems that each individual agency must support, promote 

standardization, and reduce the duplication of efforts. COEs can also 

create economies of scale by consolidating selected financial functions into 

a single agency or center. The economies of scale come from being able to 

use fewer staff to achieve the same results. For example, major software 

vendors often issue a software patch daily that must be tested and 

installed. A single COE would be able to test and update multiple agencies’ 

39Case management involves managing claims or investigations including creating, routing, 

tracing, assignment and closing of a case, as well as collaboration among case handlers.
Page 30 GAO-05-881 FFMIA FY 2004 Results

systems rather than having multiple agencies each performing the same 

update. 

Officials at OMB stated that the financial management LOB continues to 

evolve with four agencies40 being selected to become COEs through the 

fiscal year 2006 budgetary process. In addition, OMB led the development 

of a due diligence checklist to assess an agency’s capacity to be a COE. This 

checklist documents whether an agency can perform specific functions, 

has proper certification and accreditation, and uses a PMO-certified 

system. OMB has plans to develop additional tools and guidance to 

facilitate the COE concept. For example, OMB is considering a service level 

agreement template to provide agencies with standard contract clauses and 

will require agencies to document and justify the competition and selection 

process.

OMB officials stated that the policies and procedures established through 

the financial management LOB will help keep federal financial 

management systems current; improve business processes; and with fewer 

systems in operation, facilitate vendor contracts. We have long supported 

and called for initiatives to standardize and streamline common financial 

systems, which may not only reduce costs but, if done correctly, can 

dramatically improve accountability. We have ongoing work to analyze the 

financial management LOB.

DOD Continues to 

Struggle to Enhance 

Financial Management

As we have stated in our prior reports,41 DOD’s financial management and 

related business operations continue to cause substantial waste and 

inefficiency, have an adverse impact on mission performance, and result in 

the lack of adequate transparency and appropriate accountability across all 

major business areas. Of the 25 areas on GAO’s governmentwide high-risk 

list, 8 are DOD-specific program areas related to key business functions, 

40GSA, the Department of the Interior’s National Business Center, the Department of the 

Treasury’s Bureau of the Public Debt, and DOT.

41GAO, DOD Business Transformation: Sustained Leadership Needed to Address Longstanding Financial and Business Management Problems, GAO-05-723T (Washington, D.C.: 

Jun. 8, 2005); GAO, DOD Business Systems Modernization: Billions Being Invested 

without Adequate Oversight, GAO-05-381 (Washington, D.C.: Apr. 29, 2005); and 

Department of Defense: Further Actions Are Needed to Effectively Address Business 

Management Problems and Overcome Key Business Transformation Challenges, GAO-05-

140T (Washington, D.C.: Nov. 17, 2004).
Page 31 GAO-05-881 FFMIA FY 2004 Results

and the department shares responsibility for 6 other high-risk areas that are 

governmentwide in scope.42 These problems preclude the department from 

producing reliable and timely data on its results of operations and 

accurately reporting on its trillions of dollars of assets and liabilities. 

Additionally, DOD’s stovepiped, duplicative, and nonintegrated systems 

environment contributes to these operational problems and costs the 

American taxpayers billions of dollars each year. For fiscal year 2005, the 

department requested approximately $13 billion to operate, maintain, and 

modernize its reported 4,150 business systems.43

Overhauling the financial management and business operations of one of 

the largest and most complex organizations in the world represents a 

daunting challenge. In an effort to better manage DOD’s resources, the 

Secretary of Defense has appropriately placed a high priority on 

transforming key business processes to improve their efficiency and 

effectiveness in supporting the department’s military mission. The Business 

Management Modernization Program is the department’s business 

transformation initiative; it encompasses defense policies, processes, 

people, and systems that guide, perform, or support all aspects of business 

management—including development and implementation of the business 

enterprise architecture or modernization blueprint. The Secretary of 

Defense has estimated that improving business operations of the 

department could save 5 percent of DOD’s annual budget, which equates to 

a savings of over $20 billion a year.

Transformation of DOD’s business systems and operations is critical to the 

department having the ability to provide Congress and DOD management 

with accurate and timely information for use in the decision-making 

process. Although the Secretary of Defense and several key agency officials 

have shown commitment to transformation, little tangible evidence of 

42See GAO-05-207. The eight specific DOD high-risk areas are (1) approach to business 

transformation, (2) business systems modernization, (3) contract management, (4) financial 

management, (5) personnel security clearance program, (6) supply chain management, 

(7) support infrastructure management, and (8) weapon systems acquisition. The six 

governmentwide high-risk areas that include DOD are (1) disability programs, 

(2) interagency contracting, (3) information systems and critical infrastructure, 

(4) information sharing for homeland security, (5) human capital, and (6) real property. 

43Business systems include financial and nonfinancial systems such as civilian personnel, 

finance, health, logistics, military personnel, procurement, and transportation, with the 

common element being the generation or use of financial data to support DOD’s business 

operations.
Page 32 GAO-05-881 FFMIA FY 2004 Results

significant broad-based and sustainable improvements has been seen in 

DOD’s business operations. For DOD to successfully transform its business 

operations, it will need a comprehensive and integrated business 

transformation plan; people with the skills, responsibility, and authority to 

implement the plan; an effective process and related tools, such as a 

business enterprise architecture;44 and results-oriented performance 

measures that link institutional, unit, and individual personnel goals and 

expectations to promote accountability for results. 

Continuing 

Congressional Interest 

Helps Provide 

Accountability

The leadership and support demonstrated by Congress has been essential 

in the reformation of financial management in the federal government. As 

previously discussed, the legislative framework provided by the CFO Act 

and FFMIA, among others, established a solid foundation for stimulating 

change needed to achieve sound financial systems management. For 

example, in November 2002, Congress enacted the Accountability of Tax 

Dollars Act to extend the financial statements audit requirements of the 

CFO Act to additional federal agencies. Then, in October 2004, Congress 

added DHS to the list of CFO Act agencies and required DHS to obtain an 

audit opinion on its internal controls. In addition, DHS will be subject to 

FFMIA for fiscal year 2005 and its auditors will be required to report any 

FFMIA-related systems deficiencies or weaknesses identified. Sustained 

congressional interest in these issues has been demonstrated by the 

number of hearings on federal financial management and reform held over 

the past several years. It is critical that the various appropriations, budget, 

authorizing, and oversight committees hold agency top management 

accountable for resolving these problems and that the committees continue 

to support improvement efforts. 

The continued attention by Congress to these issues is crucial in sustaining 

momentum for financial management reform in the federal government. 

Toward this end, the Subcommittee on Government Management, Finance 

and Accountability, House Committee on Government Reform is currently 

examining the consolidation of existing federal financial management laws 

into legislation that would simplify, streamline, and enhance the laws 

governing agency financial management. These laws were primarily 

designed to increase financial accountability, enhance agency strategic 

focus, promote sound management through effective internal control, 

44A business enterprise architecture is a well-defined blueprint for operational and 

technological change.
Page 33 GAO-05-881 FFMIA FY 2004 Results

provide for effective information technology deployment, facilitate debt 

collection activities, and encourage better asset management. These are all 

interrelated management concepts, which the subcommittee intends to 

bring together under a single unified statute so that rules and regulations 

are clearly delineated for federal managers, which will enhance 

accountability for the federal government.

Conclusions Continuing problems with agencies’ financial systems make it difficult for 

agencies to produce reliable, useful, and timely financial information on an 

ongoing basis for day-to-day management. While the number of agencies 

receiving unqualified or “clean” opinions on their financial statements has 

increased since fiscal year 1997, the continued widespread noncompliance 

with FFMIA shows that agencies have a long way to go before having 

systems, processes, and controls able to routinely generate reliable, useful, 

and timely information. 

As shown by the FFMIA-related problems reported in agency audit reports, 

federal financial management systems are not currently able to provide 

federal managers with the financial data needed for effective day-to-day 

management of their programs or for efficient external reporting. We 

continue to be concerned that the full nature and scope of the problems 

have not yet been identified because most auditors have only provided 

negative assurance in their FFMIA reports. We believe the law requires 

auditors to provide positive assurance on FFMIA compliance. Therefore, 

we reaffirm our recommendation made in prior reports that OMB revise its 

current FFMIA guidance to require agency auditors to provide a statement 

of positive assurance when reporting an agency’s systems to be in 

substantial compliance. Such a determination will require auditors to 

perform a more thorough examination of their agencies’ systems. We also 

reaffirm our other prior recommendation for OMB to explore further 

clarification of the definition of “substantial compliance” in its FFMIA 

guidance to encourage consistent reporting among agency auditors. As we 

have stated in prior reports,45 the auditors we have interviewed expressed 

concerns about providing positive assurance when reporting on agency 

systems’ FFMIA compliance because of their belief that the meaning of 

substantial compliance needs to be clarified.

45GAO-02-29, GAO-03-31, and GAO-05-20.
Page 34 GAO-05-881 FFMIA FY 2004 Results

The size and complexity of the federal government presents a formidable 

management challenge to modernize and improve its financial management 

systems that will require continued attention from the highest levels of 

government. We recognize that it will take time, investment, and sustained 

emphasis on correcting deficiencies to improve federal financial 

management systems to the level required by FFMIA. However, with 

concerted and coordinated effort, including attention from top agency 

management and the Congress, the federal government can make progress 

toward improving its financial management systems and thus achieve the 

goals of the CFO Act and provide accountability to the nation’s taxpayers.

Agency Comments and 

Our Evaluation

In written comments (reprinted in app. VI) on a draft of this report, OMB 

generally agreed with our assessment that while federal agencies continue 

to make progress in addressing financial management systems 

weaknesses, many agencies still need to make improvements to produce 

the information needed to efficiently and effectively manage day-to-day 

operations. As in previous years, OMB did not see the necessity of our 

recommendation for agency auditors to provide a statement of positive 

assurance when reporting agency systems to be in substantial compliance 

with the requirements of FFMIA. While OMB commends DOL’s auditors for 

performing the additional level of audit work needed to provide positive 

assurance of compliance with FFMIA and encourages similar efforts at 

other agencies, OMB stated that requiring a statement of positive assurance 

for all agencies would prove only marginally useful. OMB stated that the 

framework of performance standards established under the PMA, as well 

as the ongoing efforts to update policy guidance, such as the internal 

control requirements in OMB Circular No. A-123, provide alternative 

mechanisms for evaluating FFMIA compliance. The PMA and Circular No. 

A-123 initiatives are two examples of current OMB efforts intended to 

complement FFMIA’s goal of creating the full range of information needed 

for day-to-day management. From OMB’s perspective, these efforts 

together with existing audit processes can provide an accurate assessment 

of substantial compliance, identify deficiencies, and suggest corrective 

actions. 

While we agree that the PMA and OMB Circular No. A-123 initiatives are 

helping to drive improvements, auditors need to consider other aspects of 

financial management systems when assessing FFMIA compliance that are 

not fully addressed through the current reporting structure. For example, 

in preparing the PMA scorecard assessments, OMB officials meet with 

agencies to discuss a number of financial management issues and have 
Page 35 GAO-05-881 FFMIA FY 2004 Results

systems demonstrations. Our concern is that some of the information 

provided by this approach does not come under audit scrutiny and may not 

be reliable. Similarly, internal control assessments performed under 

Circular No. A-123 are based on management’s judgment and are subject to 

review by independent auditors only in limited circumstances. From our 

perspective, an opinion by an independent auditor on FFMIA compliance 

would confirm that an agency’s systems substantially met the requirements 

of FFMIA and provide additional confidence in the information provided as 

a result of the PMA and Circular No. A-123 initiatives. Finally, we continue 

to believe that a statement of positive assurance is a statutory requirement 

under the act.

With regard to our prior recommendation, which we reaffirmed in this 

report, for revised guidance that clarifies the definition of substantial 

compliance, OMB said that the experience obtained from helping agencies 

implement the standards incorporated in the PMA will allow a further 

refinement of the FFMIA indicators associated with substantial 

compliance. Therefore, OMB agreed to consider clarifying the definition of 

“substantial compliance” in future policy and guidance updates. As we 

noted in our prior reports,46 auditors we interviewed expressed a need for 

clarification regarding the meaning of substantial compliance. 

OMB also provided additional oral comments, which we incorporated as 

appropriate.

We are sending copies of this report to the Chairman and Ranking Minority 

Member, Subcommittee on Federal Financial Management, Government 

Information, and International Security, Senate Committee on Homeland 

Security and Governmental Affairs, and to the Chairman and Ranking 

Minority Member, Subcommittee on Government Management, Finance, 

and Accountability, House Committee on Government Reform. We are also 

sending copies to the Director of the Office of Management and Budget, the 

Secretary of Homeland Security, the heads of the 23 CFO Act agencies in 

our review, and agency CFOs and IGs. Copies will be made available to 

others upon request. In addition, this report will be available at no charge 

on the GAO Web site at http://www.gao.gov.

46GAO-02-29, GAO-03-31, and GAO-05-20.
Page 36 GAO-05-881 FFMIA FY 2004 Results

This report was prepared under the direction of Sally E. Thompson, 

Director, Financial Management and Assurance, who may be reached at 

(202) 512-2600 or by e-mail at thompsons@gao.gov if you have any 

questions. Contact points for our Offices of Congressional Relations and 

Public Affairs may be found on the last page of this report. Key 

contributors to this report are listed in appendix VIII.

David M. Walker

Comptroller General

of the United States
Page 37 GAO-05-881 FFMIA FY 2004 Results

Appendix I

Requirements and Standards Supporting Apendxies

Federal Financial Management ApendxiI

Financial Management 

Systems Requirements 

The policies and standards prescribed for executive agencies to follow in 

developing, operating, evaluating, and reporting on financial management 

systems are defined in Office of Management and Budget (OMB) Circular 

No. A-127, Financial Management Systems. The components of an 

integrated financial management system include the core financial system,1

managerial cost accounting system, administrative systems, and certain 

programmatic systems. Administrative systems are those that are common 

to all federal agency operations2

 and programmatic systems are those 

needed to fulfill an agency’s mission. 

Circular No. A-127 refers to the series of publications entitled Federal 

Financial Management Systems Requirements, initially issued by the Joint 

Financial Management Improvement Program’s (JFMIP) Program 

Management Office (PMO)3

 as the primary source of governmentwide 

requirements for financial management systems. Appendix II lists the 

federal financial management systems requirements published to date. 

Figure 4 is the current model that illustrates how these systems interrelate 

in an agency’s overall systems architecture. 

1

Core financial systems, as defined by the JFMIP PMO, include managing general ledger, 

funding, payments, receivables, and certain basic cost functions. 

2

Examples of administrative systems include budget, acquisition, travel, property, and 

human resources and payroll. 

3

In December 2004, OMB announced a realignment of JFMIP’s responsibilities. Specifically, 

under the announced realignment, the PMO will continue its software certification process, 

but now report to the chair of a new Chief Financial Officers Council (CFOC) committee—

the Financial Systems Integration Committee (FSIC). Also, systems requirements will be 

issued by OFFM. Therefore, JFMIP has ceased to exist as a separate organization, although 

the Principals will continue to meet at their discretion.
Appendix I

Requirements and Standards Supporting 

Federal Financial Management

Page 38 GAO-05-881 FFMIA FY 2004 Results

Figure 4: Agency Systems Architecture

OMB Circular No. A-127 also requires agencies to purchase commercial offthe-shelf (COTS) software that has been tested and certified through the 

PMO software certification process when acquiring core financial systems. 

The PMO’s certification process, however, does not eliminate or 

significantly reduce the need for agencies to develop and conduct 

comprehensive testing efforts to ensure that the COTS software meets their 

requirements. Moreover, according to the PMO, core financial systems 

certification does not mean that agencies that install these packages will 

have financial management systems that are compliant with FFMIA. Many 

other factors can affect the capability of the systems to comply with 

FFMIA, including modifications made to the PMO-certified core financial 

Departmental Executive Information System

Workstation Support Tools

Guaranteed

Loan

System

Benefit

System

Direct

Loan

System

Seized

Property

& Forfeited

Asset

Systems

Travel

System Human Resources

& Payroll

System

Non-financial

Systems

Budget

Formulation

System

Revenue

Acquisition System System

Property

Management

Systems

Inventory

System

Grant Financial

System

Insurance Claim

System

Financial

Reporting

System

Managerial CostAccountni g

Core

Financial

System

Source: OMB’s Office of Federal Financial Management (OFFM). Effective December 1, 2004, all financial management system

requirements documents and other guidance initially issued by the JFMIP were transferred to OFFM and remain in effect until modified.
Appendix I

Requirements and Standards Supporting 

Federal Financial Management

Page 39 GAO-05-881 FFMIA FY 2004 Results

management systems software and the validity and completeness of data 

from feeder systems. 

Federal Accounting 

Standards 

The Federal Accounting Standards Advisory Board (FASAB)4 promulgates 

federal accounting standards that agency Chief Financial Officers use in 

developing financial management systems and preparing financial 

statements. FASAB develops the appropriate accounting standards after 

considering the financial and budgetary information needs of Congress, 

executive agencies, and other users of federal financial information and 

comments from the public. FASAB forwards the standards to the three 

sponsors—the Comptroller General, the Secretary of the Treasury, and the 

Director of OMB—for a 90-day review. If there are no objections during the 

review period, the standards are considered final, and FASAB publishes 

them on its Web site and in print.

The American Institute of Certified Public Accountants has recognized the 

federal accounting standards promulgated by FASAB as being generally 

accepted accounting principles for the federal government. This 

recognition enhances the acceptability of the standards, which form the 

foundation for preparing consistent and meaningful financial statements 

both for individual agencies and the government as a whole. Currently, 

there are 29 Statements of Federal Financial Accounting Standards 

(SFFAS) and 4 Statements of Federal Financial Accounting Concepts 

(SFFAC).5

 The concepts and standards are the basis for OMB’s guidance to 

agencies on the form and content of their financial statements and for the 

government’s consolidated financial statements. Appendix III lists the 

concepts, standards, interpretations,6

 and technical bulletins, along with 

their respective effective dates.

4

In October 1990, the Secretary of the Treasury, the Director of OMB, and the Comptroller 

General established FASAB to develop a set of generally accepted accounting standards for 

the federal government. Effective October 1, 2003, FASAB is comprised of six nonfederal or 

public members, one member from the Congressional Budget Office, and the three 

sponsors. 

5

Accounting standards are authoritative statements of how particular types of transactions 

and other events should be reflected in financial statements. SFFACs explain the objectives 

and ideas upon which FASAB develops the standards.

6

An interpretation is a document of narrow scope that provides clarifications of original 

meaning, additional definitions, or other guidance pertaining to an existing federal 

accounting standard.
Appendix I

Requirements and Standards Supporting 

Federal Financial Management

Page 40 GAO-05-881 FFMIA FY 2004 Results

FASAB’s Accounting and Auditing Policy Committee (AAPC)7 assists in 

resolving issues related to the implementation of accounting standards. 

AAPC’s efforts result in guidance for preparers and auditors of federal 

financial statements in connection with implementation of accounting 

standards and the reporting and auditing requirements contained in OMB’s 

Bulletin No. 01-09, Form and Content of Agency’s Financial Statements 

(Sept. 25, 2001), and Bulletin No. 01-02, Audit Requirements for Federal 

Financial Statements (Oct. 16, 2000). To date, AAPC has issued six 

technical releases, which are listed in appendix IV along with their release 

dates.

U.S. Government 

Standard General 

Ledger 

The SGL was established by an interagency task force under the direction 

of OMB and mandated for use by agencies in OMB and Treasury regulations 

in 1986. The SGL promotes consistency in financial transaction processing 

and reporting by providing a uniform chart of accounts and pro forma 

transactions used to standardize federal agencies’ financial information 

accumulation and processing throughout the year; enhance financial 

control; and support budget and external reporting, including financial 

statement preparation. The SGL is intended to improve data stewardship 

throughout the federal government, enabling consistent reporting at all 

levels within the agencies and providing comparable data and financial 

analysis governmentwide.8

Internal Control 

Standards 

Congress enacted legislation, 31 U.S.C. 3512(c),(d) (commonly referred to 

as the Federal Managers’ Financial Integrity Act of 1982 (FIA)), to 

strengthen internal controls and accounting systems throughout the federal 

government, among other purposes. Issued pursuant to FIA, the 

Comptroller General’s Standards for Internal Control in the Federal 

Government9

 provides standards that are directed at helping agency 

managers implement effective internal control, an integral part of 

7

In 1997, FASAB, in conjunction with OMB, Treasury, GAO, the CFOC, and the President’s 

Council on Integrity and Efficiency, established AAPC to assist the federal government in 

improving financial reporting.

8

SGL guidance is published in the Treasury Financial Manual. Treasury’s Financial 

Management Service is responsible for maintaining the SGL and answering agency inquiries.

9

GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3

(Washington, D.C.: November 1999).
Appendix I

Requirements and Standards Supporting 

Federal Financial Management

Page 41 GAO-05-881 FFMIA FY 2004 Results

improving financial management systems. Internal control is a major part 

of managing an organization and comprises the plans, methods, and 

procedures used to meet missions, goals, and objectives. In summary, 

internal control, which under OMB’s guidance for FIA is synonymous with 

management control, helps government program managers achieve desired 

results through effective stewardship of public resources. 

In December 2004, OMB revised Circular No. A-123, Management’s 

Responsibility for Internal Control, to strengthen the requirements for 

conducting management’s assessment of internal control over financial 

reporting. The circular emphasized management’s responsibility for 

establishing and maintaining internal control to achieve the objectives of 

effective and efficient operations, reliable financial reporting, and 

compliance with laws and regulations.

Effective internal control also assists in managing the changes due to 

shifting environments and evolving demands and priorities. As programs 

change and agencies strive to improve operational processes and 

implement new technological developments, management must 

continually assess and evaluate its internal control to ensure that the 

control objectives are being achieved. 
Page 42 GAO-05-881 FFMIA FY 2004 Results

Appendix II

Publications in the Federal Financial 

Management Systems Requirements Series ApendxiI

Source: OMB’s OFFM. 

Note: Effective December 1, 2004, all financial management system requirements documents and 

other guidance initially issued by JFMIP were transferred to OFFM and remain in effect until modified. 

FFMSR document Issue date

FFMSR-8 System Requirements for Managerial Cost Accounting February 1998

JFMIP-SR-99-5 Human Resources & Payroll Systems Requirements April 1999

JFMIP-SR-99-8 Direct Loan System Requirements June 1999

JFMIP-SR-99-9 Travel System Requirements July 1999

JFMIP-SR-99-14Seized Property and Forfeited Assets Systems Requirements December 1999

JFMIP-SR-00-01Guaranteed Loan System Requirements March 2000

JFMIP-SR-00-3 Grant Financial System Requirements June 2000

JFMIP-SR-00-4 Property Management Systems Requirements October 2000

JFMIP-SR-01-01 Benefit System Requirements September 2001

JFMIP-SR-02-01 Core Financial System Requirements November 2001

JFMIP-SR-02-02 Acquisition/Financial Systems Interface Requirements June 2002

JFMIP-SR-03-01 Revenue System Requirements January 2003

JFMIP-SR-03-02 Inventory, Supplies and Materials System Requirements August 2003

JFMIP-SR-02-01 Addendum to Core Financial System Requirements March 2004

JFMIP-SR-01-04 Framework for Federal Financial Management Systems April 2004

OFFM-NO-0105 Core Financial System Requirements (Exposure Draft) February 2005

OFFM-NO-0206 Insurance System Requirements (Exposure Draft) May 2005
Page 43 GAO-05-881 FFMIA FY 2004 Results

Appendix III

Statements of Federal Financial Accounting 

Concepts, Standards, Interpretations, and 

Technical Bulletins ApendxiI

Concepts

SFFAC No. 1Objectives of Federal Financial Reporting

SFFAC No. 2 Entity and Display

SFFAC No. 3 Management’s Discussion and Analysis

SFFAC No. 4 Intended Audience and Qualitative Characteristics for the Consolidated Financial Report of the United States Government

Standards Effective for 

fiscal yeara

SFFAS No. 1 Accounting for Selected Assets and Liabilities 1994

SFFAS No. 2 Accounting for Direct Loans and Loan Guarantees 1994

SFFAS No. 3 Accounting for Inventory and Related Property 1994

SFFAS No. 4 Managerial Cost Accounting Concepts and Standards 1998

SFFAS No. 5 Accounting for Liabilities of the Federal Government 1997

SFFAS No. 6 Accounting for Property, Plant, and Equipment 1998

SFFAS No. 7 Accounting for Revenue and Other Financing Sources 1998

SFFAS No. 8 Supplementary Stewardship Reporting 1998

SFFAS No. 9 Deferral of the Effective Date of Managerial Cost Accounting Standards for the Federal Government in 

SFFAS No. 4

1998

SFFAS No. 10 Accounting for Internal Use Software 2001

SFFAS No. 11 Amendments to Accounting for Property, Plant, and Equipment—Definitional Changes 1999

SFFAS No. 12 Recognition of Contingent Liabilities Arising from Litigation: An Amendment of SFFAS No. 5, Accounting 

for Liabilities of the Federal Government

1998

SFFAS No. 13 Deferral of Paragraph 65-2—Material Revenue-Related Transactions Disclosures 1999

SFFAS No. 14 Amendments to Deferred Maintenance Reporting 1999

SFFAS No. 15 Management’s Discussion and Analysis 2000

SFFAS No. 16 Amendments to Accounting for Property, Plant, and Equipment 2000

SFFAS No. 17 Accounting for Social Insurance 2000

SFFAS No. 18 Amendments to Accounting Standards for Direct Loans and Loan Guarantees in SFFAS No. 2 2001

SFFAS No. 19 Technical Amendments to Accounting Standards for Direct Loans and Loan Guarantees in SFFAS No. 2 2003

SFFAS No. 20 Elimination of Certain Disclosures Related to Tax Revenue Transactions by the Internal Revenue 

Service, Customs, and Others

2001

SFFAS No. 21 Reporting Corrections of Errors and Changes in Accounting Principles 2002

SFFAS No. 22 Change in Certain Requirements for Reconciling Obligations and Net Cost of Operations 2001

SFFAS No. 23 Eliminating the Category National Defense Property, Plant, and Equipment 2003

SFFAS No. 24 Selected Standards for the Consolidated Financial Report of the United States Government 2002

SFFAS No. 25 Reclassification of Stewardship Responsibilities and Eliminating the Current Services Assessment 

(amended)

2006

SFFAS No. 26 Presentation of Significant Assumptions for the Statement of Social Insurance: Amending SFFAS 25 

(amended)

2006
Appendix III

Statements of Federal Financial Accounting 

Concepts, Standards, Interpretations, and 

Technical Bulletins

Page 44 GAO-05-881 FFMIA FY 2004 Results

Source: FASAB.

a

Effective dates do not apply to Statements of Federal Financial Accounting Concepts, Interpretations, 

and Technical Bulletins.

Standards Effective for 

fiscal yeara

SFFAS No. 27 Identifying and Reporting Earmarked Funds 2006

SFFAS No. 28 Deferral of the Effective Date of Reclassification of the Statement of Social Insurance: Amending SFFAS 

25 and 26

2006

SFFAS No. 29 Heritage Assets and Stewardship Land 2006

Interpretations

No. 1 Reporting on Indian Trust Funds

No. 2 Accounting for Treasury Judgment Fund Transactions

No. 3 Measurement Date for Pension and Retirement Health Care Liabilities

No. 4 Accounting for Pension Payments in Excess of Pension Expense

No. 5 Recognition by Recipient Entities of Receivable Nonexchange Revenue

No. 6 Accounting for Imputed Intra-departmental Costs

Technical Bulletins

TB 2000-1 Purpose and Scope of FASAB Technical Bulletins and Procedures for Issuance

TB 2002-1 Assigning to Component Entities Costs and Liabilities That Result From Legal Claims Against the Federal Government

TB 2002-2 Disclosures Required by Paragraph 79(g) of SFFAS 7

TB 2003-1 Certain Questions and Answers Related to the Homeland Security Act of 2002

(Continued From Previous Page)
Page 45 GAO-05-881 FFMIA FY 2004 Results

Appendix IV

AAPC Technical Releases ApendxiIV

Source: FASAB.

Technical release AAPC release date

TR-1 Audit Legal Representation Letter Guidance March 1, 1998

TR-2 Determining Probable and Reasonably Estimable for Environmental Liabilities in the Federal Government March 15, 1998

TR-3 Preparing and Auditing Direct Loan and Loan Guarantee Subsidies Under the Federal Credit Reform Act July 31, 1999

TR-4 Reporting on Non-Valued Seized and Forfeited Property July 31, 1999

TR-5 Implementation Guidance on SFFAS No. 10: Accounting for Internal Use Software May 14, 2001

TR-6 Preparing Estimates for Direct Loan and Loan Guarantee Subsidies Under the Federal Credit Reform Act 

(Amendments to TR-3)

January 2004
Page 46 GAO-05-881 FFMIA FY 2004 Results

Appendix V

Checklists for Reviewing Systems under the 

Federal Financial Management Improvement 

Act ApendxiV

Source: GAO.

Checklist Issue date

GAO/AIMD-00-21.2.3 Human Resources and Payroll Systems Requirements March 2000

GAO-01-99G Seized Property and Forfeited Assets Systems Requirements October 2000

GAO/AIMD-21-2.6 Direct Loan System Requirements April 2000

GAO/AIMD-21.2.8 Travel System Requirements May 2000

GAO/AIMD-99-21.2.9 System Requirements for Managerial Cost Accounting January 1999

GAO-01-371G Guaranteed Loan System Requirements March 2001

GAO-01-911G Grant Financial System Requirements September 2001

GAO-02-171G Property Management Systems Requirements December 2001

GAO-04-22G Benefit System Requirements October 2003

GAO-04-650G Acquisition/Financial Systems Interface Requirements June 2004

GAO-05-225G Core Financial System Requirements February 2005
Page 47 GAO-05-881 FFMIA FY 2004 Results

Appendix VI

Comments from the Office of Management 

and Budget ApendxiVI
Appendix VI

Comments from the Office of Management 

and Budget

Page 48 GAO-05-881 FFMIA FY 2004 Results
Page 49 GAO-05-881 FFMIA FY 2004 Results

Appendix VII

Auditors’ FFMIA Determinations for Fiscal 

Year 2004 ApendxiVI

Source: GAO prepared from analysis of fiscal year 2004 audit reports.

Agency

Auditor's assessment of 

compliance

Areas of reported systems lack of 

substantial compliance

Yes No

Systems 

requirements

Accounting 

standards SGL

Department of Agriculture x x x x

Department of Commerce x

Department of Defense x x x x

Department of Education x x

Department of Energy x

Department of Health and Human Services x x x

Department of Housing and Urban Development x x x

Department of the Interior x x x x

Department of Justice x x x x

Department of Labor x

Department of State x x x

Department of Transportation x x x x

Department of the Treasury x x x x

Department of Veterans Affairs x x

Agency for International Development x x x

Environmental Protection Agency x

General Services Administration x

National Aeronautics and Space Administration x x x x

National Science Foundation x

Nuclear Regulatory Commission x x

Office of Personnel Management x x x x

Small Business Administration x x x x

Social Security Administration x

Total 7 16 16 11 11
Page 50 GAO-05-881 FFMIA FY 2004 Results

Appendix VIII

GAO Contact and Staff Acknowledgments ApendxiVI

GAO Contact Sally E. Thompson, (202) 512-2600

Acknowledgments In addition to the contact named above, Kay L. Daly, Assistant Director; 

W. Stephen Lowrey; and Chanetta R. Reed made key contributions to this 

report.

(193056) 
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